IRS CONFIRMS MFS SPLIT SCHEME FOR UNEMPLOYMENT DEDUCTION

[Drphibes]

The IRS has added a new Q4 to it's FAQ on unemployment deduction confirming community property states can file MFS returns to bring each spouse below $150,000 and that the unemployment is split and each return is entitled to the $10,200 unemployment deduction:

https://www.irs.gov/newsroom/2020-unemployment-compensation-exclusion-faqs-topic-a-eligibility

Question then is, if the IRS has confirmed that each spouse gets 1/2 of unemployment, then a MFJ return in a community property state with a combined income below $150,000 would be able to take max $20,400 even if just 1 spouse had $25,000 of unemployment and the other none without having to file separate tax returns.  Have 4 already filed MFJ returns that I am creating paper Superseded returns for tomorrow for a hefty fee each which the clients have confirmed they are happy to pay.  Will also be looking to file amended returns for the MFJ returns below $150k once this has been confirmed.

[George4Tacks]

Lacerte has confirmed that you can e-file 1040x for two MFS returns by the due date. Maybe @IntuitBettyJo could get someone to confirm. 

[BobKamman]

You're assuming that IRS is not going to automatically allow the higher exclusion for MFJ returns from community-property states?  That's probably a safe assumption, but I would wait a few weeks to see if they announce something about this.  

There are two categories of returns involved:  Those filed before the exclusion was enacted; and those filed with the exclusion allowed to only one spouse.  (I wouldn't charge a fee for doing those, preparers should know better.)  The first category, the logical action would be for IRS to ask the taxpayers if it is community income. They can't always know  just from the address.  Don't expect that from IRS, though. The second category, they could do the same, but they're very busy with other problems.

I gave my clients an envelope addressed to IRS with a tracking-number label, and I printed the tracking history that showed delivery.  If MFJ-to-MFS returns can now be e-filed, what kind of ack is received?  Enough to withstand IRS claim of late filing?

[Drphibes]

Yes, I just read several IRM's that confirm a 1040x filed before due date is considered a Superseding return.  Question is, for a communy property state, do report 1/2 of the original return MFJ that was filed?  It seems the logical thing to do but not sure.

[sjrcpa]

Form 8958 is used to allocate community income between the spouses.

[BobKamman]

I just had one couple turn down a $4,000 tax savings because filing separately sounded too complicated.  One of them has $16,000 of unemployment, in a community-property state.  But as pointed out in other posts here recently, you have to watch out for the higher Medicare Part B premiums that kick in when AGI exceeds $88,000 (for 2020, probably $90,000).  To avoid paying an additional $4,000 or so in Medicare premiums in 2022, they would have to each contribute at least $5,000 to an IRA.  As I explained, they could take it out the next day (they are both in the 60-70 age range).  But they weren't buying what I was selling -- they were happy just to be getting a meager refund from a joint return.  

As I told my assistant, "pearls to swine," as I moved on to the next return.  

[Kathleen1]

So now that the IRS has confirmed that the double exclusion is available on a MFJ return in a community property state, anyone able to get an answer from Lacerte as to when they will update the program.  I've seen posts that some other software companies have already updated to give the double exclusion.

https://www.irs.gov/forms-pubs/unemployment-exclusion-update-for-married-taxpayers-living-in-a-commu...

[abctax55]

Considering this news/confirmation just broke yesterday, and we are heading into a three day weekend ... I would hope for updated software by next Thursday's update.

[Drphibes]

Even more interesting, will the IRS now include this in their automatic unemployment deduction correction program?  While they already announced that any additional credits and such generated by the automatic correction would not be calculated, this is direct unemployment deduction which they say will happen automatically.  I have clients that decided to only take the one unemployment deduction for the person that got the unemployment and wait to see if the IRS would allow the 2 deduction community property scheme for one taxpayer getting unemployment, then amend.  Are they going to correct those automatically also?

[BobKamman]

Are they ever going to get around to doing what they say?

Taxpayers are seeking answers about missing unemployment insurance tax refunds. The IRS has been unresponsive   https://www.cnbc.com/2021/05/27/unemployment-tax-refund-taxpayers-frustrated-irs-unresponsiveness.ht...